Credit CARD Act

What it is:

The Credit Card Accountability, Responsibility, and Disclosure Act is better known as the Credit CARD Act. The law's main purpose is to prevent certain business practices in the credit card industry that were considered unfair or even deceptive to consumers.

How it works (Example):

The act was signed into law in May 2009 and took effect in phases. However, the most significant reforms took effect in February 2010. The landmark law was the most sweeping regulatory change in the history of the credit card business.

Some highlights of what the CARD Act included:

It has greatly limited the circumstance under which credit card companies may raise interest rates on existing cardholders. Credit card rates cannot go up in the first year, with a few exceptions. For example, if the card has an introductory rate (say 0% for 6 months), the rate can increase. It can also increase if you are at least 60 days late with a payment.

Card issuers must provide at least 45 days' notice before making some major changes to credit card, including hiking interest rates. There are exceptions, however. For example, if a customer is at least 60 days late with a payment, the issuer doesn't have to wait 45 days to raise the rate.

If you have a card with multiple interest rates, all payments above the minimum payment must go toward paying off the card with the highest rate. For example, say your card has a standard APR of 15.99% and a balance transfer APR of 6.99%. If you have a minimum payment of $20 and you pay $70, that extra $50 must be put toward the balance with the higher APR -- in this case, 15.99%.

If a cardholder is given a "grace period" to pay her bill without being charged interest, that period must be at least 21 days. An issuer is not required to include a grace period; however, if one is given, it must be at least 21 days long.

A cardholder's credit card statement must include information on how long it will take to pay off your balance if you only make the minimum payment. For example, a bill might show the following: "If you owe $5,000 in credit card debt, your APR is 15%, and you make the $200 minimum payment, it will take you 105 months to pay off your balance."

The CARD Act also makes it more difficult for people under age 21 to open a credit card account. A person under 21 must either have a co-signer on the account, or they must provide evidence that they have enough income to make monthly payments. Previously, there were no such restrictions.

The law also curbed over-the-limit fees (or overdraft fees) -- charges that popped up when a consumer spent more than what their credit limit allowed. In order for a customer to be charged an overdraft fee, that person must have opted in to the arrangement. They cannot be automatically enrolled in such a program without giving their consent. If they don't consent, a credit card company must turn down the transaction altogether.

You can learn about several other new provisions of the law here on the Federal Reserve Board's website.

Why it Matters:

Overall, the CARD Act is designed to make credit cardterms, interest rates, and fees less penalizing, more transparent and more understandable to consumers.

Critics of the law have noted, however, that because the CARD Act has threatened revenue within the credit card industry, card companies have compensated by simply offering fewer fixed-rate interest credit cards and more adjustable rate cards. Companies have also been charging higher initial interest rates for applicants with lower credit scores to make up for lost revenues caused by the CARD Act.

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